







































Ecology, Economy, and Society–the INSEE Journal 7(1): 3-11, January 2024 

COMMENTARY 

Will the Green Credit Programme Incentivize Positive 
Environmental Actions? 

Surender Kumar* 

Abstract: The Government of India has launched the Green Credit Programme 
(GCP)—a market-based voluntary programme—to enhance energy and resource-
use efficiency, foster conservation of resources, mitigate climate change, and 
strengthen adaptive capacity. The programme intends to incentivize the adoption of 
environmentally sustainable technologies and processes through fiscal and financial 
nudges and effect behavioural changes. The efficacy of a policy programme depends 
on its design and implementation, though, in theory, such programmes are designed 
to be cost-effective, environmentally favourable, as well as economically inclusive. 
The success of a tradable programme should be judged on the basis of four 
parameters: design of the programme, minimization of transaction costs, market 
volatility, and leakage and environmental degradation. The GCP administrators have 
yet to issue an effective design and implementation framework for the programme.  

Keywords: Market mechanism; Property rights; Environmental effectiveness; Cost 

effectiveness; Equity  

 

1. INTRODUCTION 

Recently, the Government of India launched the Green Credit Programme 
(GCP) to boost energy- and resource-use efficiency and promote the 
conservation of natural resources. The programme aims to mitigate climate 
change and augment adaptive capacity. This is a market-based voluntary 
programme in which entities are incentivized to generate positive 
environmental outcomes and trade them in the market. This unit of incentive 
is referred to as “green credit”. The objective of the GCP is to inspire 
behavioural changes by incentivizing the adoption of environmentally 
sustainable technologies and processes among businesses, individuals, and 
local bodies through fiscal and financial incentives. 

 
* Department of Economics, Delhi School of Economics, University of Delhi, Delhi-110007, 
skumar@econdse.org. 
Copyright © Kumar 2024. Released under Creative Commons Attribution © 

NonCommercial 4.0 International licence (CC BY-NC 4.0) by the author.  

Published by Indian Society for Ecological Economics (INSEE), c/o Institute of Economic 
Growth, University Enclave, North Campus, Delhi 110007.  

ISSN: 2581–6152 (print); 2581–6101 (web).  

DOI: https://doi.org/10.37773/ees.v7i1.1251  

mailto:skumar@econdse.org
https://doi.org/10.37773/ees.v7i1.1251


 Ecology, Economy and Society–the INSEE Journal [4] 

The programme falls under the Mission LiFE (Lifestyle for Environment) 
initiative launched by the Indian government at COP 26, held in Glasgow, as 
a part of its efforts to realize its Nationally Determined Contributions 
(NDCs). It seeks to protect and preserve the environment through “mindful 
and deliberate utilisation, instead of mindless and destructive consumption” 
(Modi, 2021). Various environmental and ecosystem services involved in 
LiFE will generate green credits and promote a pro-planet and pro-people 
way of life. These green credits can be used by business entities to meet their 
legal requirements under environmental laws. The GCP aims to leverage a 
market-based mechanism to incentivize individuals and businesses to 
undertake positive environmental actions. 

Markets cannot provide optimal levels of environmental or ecosystem 
services. These services involve public good characteristics and, therefore, 
they remain underprovided in a market-based system. Programmes such as 
the GCP aim to correct these market failures by creating markets through 
government interventions. These markets, which are driven by regulations, 
reward the creators of these services instead of using punitive measures such 
as environmental taxation to correct market failures, which can be easily 
circumvented by individuals and businesses, especially in countries like India 
where tax enforcement systems are lax. 

The GCP encourages entities to adopt pro-environmental behaviours, that 
is, it rewards the generation of positive externalities. The carbon credit 
scheme incentivizes reducing emissions—it penalizes the generation of 
negative externalities. The effectiveness of such programmes depends on the 
market apparatus that facilitates the trade of green credits. Therefore, such 
trade hinges on empowering trading infrastructure and a measurement, 
reporting, and verification (MRV) framework based on, and comparable to, 
global best practices. Demand-side management policies should ensure 
market stability. This article comments on the provision of the GCP vis-à-vis 
the principles governing a market created through regulations. 

2. INCENTIVIZING ENVIRONMENTAL COMPLIANCE 

Private markets are expected to work well in the provision of private 
commodities, such as the production of crops or livestock, if the benefits or 
costs of these activities accrue mainly to the providers of these goods and 
services. However, in the provision of conservation activities, such as water 
purification and conservation or afforestation, the benefits flow primarily to 
others—that is, the provision of conservation activities generates positive 
externalities—and markets under-provide these services. 

The GCP has essentially been instituted to internalize the environmental 
externalities that arise in the provision of conservation activities. The 



[5] Kumar 

 
 

programme, in effect, attempts to put into practice the Coase theorem, which 
stipulates that the problem of externalities can, under certain conditions, be 
neutralized through private negotiations between the affected parties (Coase 
1960). It solves the externality problem by reworking the economic incentives 
that are available to private parties. These incentives allow private parties to 
decide whether and how much to alter their behaviour to attain the social 
optimal in the provision of conservation activities. Dales (1968) shows that 
the introduction of transferable property rights promotes environmental 
conservation at a lower cost in comparison to other policy options. The 
buying and selling of these property rights gives rise to an open market, thus 
yielding an optimal price for the externality. The market is thought to 
predictably ensure an optimal provision of publicness in the generation of 
conservation activities. Dales (1968, ix) reflects that “if it is feasible to 
establish a market to implement a policy, no policymaker can afford to do 
without one.” 

A policy such as the GCP should be gauged on the basis of three parameters: 
environmental effectiveness, cost-effectiveness, and equity. Environmental 
effectiveness entails that a policy should deliver a set of environmental 
benefits in terms of well-defined physical environmental parameters. To be 
environmentally effective, the programme should ensure the “additionality” 
or “infra-marginality” condition (Jayachandran et al. 2017, 267). Some 
participants may have been engaged in the incentivized activities even in the 
absence of the programme, in which case, there is very little advantage in 
terms of environmental benefits—that is, there is no significant 
environmental gain due to the programme. The other concern is that the 
gains in terms of environmental benefits from the programme in some 
contexts cause losses in other contexts. This is known as the problem of 
“leakage” (Jayachandran et al. 2017, 267). 

An incentive-based scheme, such as transferable property rights, achieves the 
desired level of environmental effectiveness and assumes that the marginal 
benefits of conservation activities are constant. This assumption simplifies 
the design of a policy, as the expected marginal benefits do not depend on 
the initial condition. However, the marginal environmental benefits of 
conservation activities depend on the source, location, and initial conditions; 
a more complex incentive-based scheme—such as an ambient permit trading 
scheme in the case of air pollution—is required to obtain the desired 
environmental outcomes (Stavins 2003). In ecological systems, there are 
many examples of non-constant marginal values and threshold effects, and, 
in these cases, it may be challenging to obtain the desired environmental 
outcomes using incentive-based schemes (Arrow et al. 2000). 



 Ecology, Economy and Society–the INSEE Journal [6] 

The cost-effectiveness of a policy implies that the same level of 
environmental benefits is being realized at a lower cost relative to other 
possible policy options. The costs of a GCP-type scheme are considered not 
only in terms of direct implementation costs but also including the 
transaction costs of the programme and the opportunity costs of the 
resources used. Transaction costs involve expenses for contract negotiation, 
performing scientific baseline studies, and monitoring and enforcement. 
Incentive-based schemes work by changing incentives rather than by making 
explicit rules or directives (Jack, Kousky, and Sims 2008). 

The main attractiveness of incentive-based schemes is their cost-
effectiveness. Allocation of production or abatement results in the 
maximization of total benefits or minimization of the total cost such that the 
marginal benefits or costs are equalized across producers. Higher variability 
in benefits or costs across producers results in higher total benefits or cost 
savings (Newell and Stavins 2003). By offering a common price for 
environmental service provision, programmes like the GCP induce the 
producers of these services to join a scheme that can provide services at a 
lower opportunity cost. In addition, those who face higher opportunity costs 
can meet their regulatory requirements by purchasing credits. Thus, society 
as a whole can achieve the desired environmental goals at a lower cost. 
However, there is an inverse relationship between the number of 
smallholders of resources and transaction costs. Implementation, 
monitoring, and enforcement costs are higher when the number of 
participants (agents) is large. Moreover, transaction costs, especially 
monitoring and enforcement costs, are lower for point sources than for 
nonpoint sources. Conservation activities are focused on nonpoint sources 
or many individual landholders whose collective activities bring about 
positive changes in the ecosystems (Jack, Kousky, and Sims 2008). 

Note that environmental effectiveness and cost-effectiveness are interlinked 
and depend on the programme design and transaction costs. Moreover, the 
effectiveness of such an incentive-based programme is also contingent on 
various existing policies. If the existing policies complement the new scheme, 
then the stated objectives are achieved easily. Equity can be an important 
policy consideration for countries such as India, where the prevalence of 
poverty and unemployment is high. 

3. THE GCP AND ENVIRONMENTAL OUTCOMES 

The Budget 2023 aims to steer the country on a low-carbon growth path with 
initiatives such as the GCP. To implement the GCP, the Ministry of 
Environment, Forest and Climate Change issued rules in October 2023 under 
the Environmental Protection Act, 1986 (Ministry of Environment, Forest 



[7] Kumar 

 
 

and Climate Change 2023). The programme is designed to encourage 
individuals, private-sector producers, farmers, small-scale industries, rural 
and urban local bodies, cooperatives, and forestry enterprises to initiate 
positive environmental actions through a competitive market mechanism. 
Private-sector industries and companies will be able to meet their obligations, 
including their legal requirements, by purchasing these credits. 

The programme covers eight sectors that will be eligible for generating green 
credits. The included sectors are tree plantation; water conservation, water 
harvesting, and water use efficiency/savings; promoting natural and 
regenerative agricultural practices; waste management; air pollution 
reduction; mangrove conservation and restoration; eco-mark-based green 
credits; and sustainable buildings and infrastructure using sustainable 
technology and material. These sectors will earn tradable green credits for 
their positive environmental actions, which will be available for trading on a 
domestic market platform. The scheme will be implemented in a phased 
manner. In the initial phase, the programme will focus on water conservation 
and afforestation activities. More sectors and activities may be included in the 
scheme in the future. These activities may earn both green credits under this 
scheme and carbon credits in the carbon market.  

The green credit for every activity undertaken under the programme will be 
calculated based on the equivalence of resource requirements and parity of 
scale, scope, size, and other relevant parameters that measure environmental 
effectiveness. To ensure environmental impact and fungibility across sectors, 
benchmarks will be set in consultation with stakeholders. However, the 
ministry’s notification does not indicate how parity can be achieved for 
different activities across sectors. Some indicative methodology is needed on 
how to arrive at parity in evaluations. 

An accredited green credit verifier will administer the programme. The 
activities of the programme will be administered, monitored, and assessed by 
an administrator. These functions have been assigned to the Indian Council 
of Forestry Research and Education (ICFRE). The ICFRE will be 
responsible for developing the necessary guidelines, processes, and 
procedures for the implementation of the programme. The administrator will 
maintain an electronic record of the issuance and exchange of green credits. 
All entities have to register with the administrator to qualify to generate green 
credits. The ICFRE will constitute various technical and sectoral committees 
for each activity to develop suitable methodologies and processes for the 
registration and issuance of green credits. A credible trading platform will be 
set up for the green credits. These credits may be exchanged on the trading 
platform once a steering committee has validated them. Participation in the 



 Ecology, Economy and Society–the INSEE Journal [8] 

programme will be voluntary, and it will be the task of the steering committee 
to recommend ways to generate demand for the green credits. 

The effectiveness of a policy programme is contingent on its design and 
implementation, though, in theory, programmes such as the GCP are 
considered cost-effective and environmentally effective as well as 
economically inclusive. In the case of the GCP, the administrator is yet to 
release an effective design and implementation framework. The success of a 
tradable programme can be measured on the basis of four parameters: design 
of the programme, minimization of transaction costs, market volatility, and 
leakage and environmental degradation. These categories are not strictly 
defined, and there is considerable intersection and interdependence among 
them. 

Lessons learnt from incentive-based schemes that have been implemented 
within and outside the country can be a valuable guide to the designing and 
implementation of the programme. Market-based credit systems have been 
applied in the area of environment and natural resources globally, though the 
Indian experience in incentive-based applications in the environmental 
domain is limited. Currently, India awards a renewable energy certificate 
(REC) for enhanced use of green and renewable energy. Similarly, the 
perform, achieve and trade (PAT) scheme has helped increase energy 
efficiency in 13 sectors. Both these programmes use a market-based credit 
system. Numerous applications of tradable permit systems in various sectors 
for achieving environmental effectiveness can be found in Europe and the 
US. 

When designing an incentive programme that is practicable and has 
environmental as well as cost-effectiveness, using an appropriate baseline for 
determining a green credit is crucial. For example, the pan-European 
Emissions Trading Scheme (EU-ETS) allowed polluters to determine 
baselines and set their abatement curves, which resulted in the allocation of 
pollution permits that compromised environmental effectiveness (Hepburn 
2007). The GCP involves many heterogeneous sectors and activities, and the 
choice of offsets should be considered for achieving environmental 
effectiveness. In the clean development mechanism (CDM), many types of 
offsets were used that may not have been effective in reducing greenhouse 
gases. In the GCP, there is no standard unit of measurement of benefits that 
accrue across various activities, which may be a concern when liquidating the 
credits while trading them. Even in the carbon market, where there is a 
homogeneous unit of measurement, tracking carbon credits is a complex 
exercise and is difficult to regulate. 



[9] Kumar 

 
 

The PAT scheme was launched in 2012, and an evaluation of the scheme at 
the end of its second cycle revealed that the thermal power sector—a major 
energy-consuming and CO2-emitting sector—could reduce just 3% of its 
total energy consumption after the scheme was implemented (Yadav et al. 
2021). Similarly, another study demonstrates that due to the poor 
enforcement of penalties among electricity distribution companies, there was 
an oversupply of RECs (Baruah 2022). Moreover, the experience of these 
two schemes reveals that demand for credits is driven mainly by obligated 
entities with little voluntary participation. 

Further, it should be noted that reviewing, auditing, and evaluating a project 
should not be excessively time-consuming because such processes involve 
transaction costs. Generally, transaction costs are higher for offsets than for 
normal trading. Offsets involve baselines, monitoring, allocation, and 
compliance oversight, which take time and result in higher transaction costs 
(Savacool 2011), compromising the cost-effectiveness of the programme. In 
the case of the CDM, approval and registration processes resulted in higher 
transaction costs, which were considered major barriers to investing in global 
carbon markets (Boyle et al. 2009). 

Since the main objective of the GCP is to achieve positive environmental 
outcomes through behavioural changes that are cost-effective, it should be 
ensured that the programme does not promote greenwashing. For example, 
in the case of carbon trading projects, the participation of polluters in the 
programme can lower the demand for carbon-intensive products and thus 
lower the price of fossil fuels. This reduction in the price of fossil fuels 
encourages overconsumption among non-participants and reduces the 
effectiveness adopting energy efficiency and conservation measures. The 
programme should be designed and implemented in such a way that it 
minimizes such leakage. 

The requirements of the GCP and the carbon trading programme need to be 
reconciled as the former is a national policy requirement and the latter is 
linked to global commitments. Since these are pursued under different laws, 
compliance will be evaluated under two different laws, which will complicate 
the monitoring exercise. Moreover, due to the problems of double counting, 
reconciling data-generating processes will be challenging. 

The GCP is an ambitious programme as it covers various heterogeneous 
sectors and activities. However, whether the programme achieves its stated 
objectives depends on how well it is designed and implemented. 



 Ecology, Economy and Society–the INSEE Journal [10] 

Ethics Statement: I hereby confirm that this study complies with requirements of 
ethical approvals from the institutional ethics committee for the conduct of this 
research.  

Conflict of Interest Statement: No potential conflict of interest was reported by 

the author. 

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